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The government must reform the British business rates system or risk “killing” a huge part of the UK commercial property market, according to a fund manager who runs over £2bn of commercial property assets.

Marcus Phayre-Mudge runs the £1.5bn TR Property investment trust for BMO, a trust which has 9 per cent of its capital deployed in physical buildings, none of which are in the UK.

The remainder of the capital is deployed in property shares, where the only UK exposure he has is to niche property businesses in areas such as student property and warehouses.

He said the dynamics driving property in the very centre of London have changed since the financial crisis, with banks now more reluctant to lend for large developments.

Mr Phayre-Mudge said bank loans have largely been replaced by capital from private equity and sovereign wealth funds, making prime London property less vulnerable to higher interest rates.

But he remains concerned about valuations, and what he said will be the significant impact of changes to business rates on commercial property.

He said: “The dynamics have changed since the financial crisis, with banks now much less likely to lend for large developments. This means UK commercial property is less sensitive to interest rates.”

The area of the market he believes will be “killed” by the changes to business rates is property let out to retailers.

He said the challenges faced by those companies from the rise of internet shopping has been made worse by the government’s changes to the business rates rules.

Business rates are levied based on the rateable value of a property. The rate varies depending on location in the country. A business with a property that is assessed as having a rateable value of above £51,000. If a property is given this value, then the rates bill faced by the business is £51,000 multiplied by 49.3p. For businesses with property at a rateable value of below £51,000 the value of the property is multiplied by 48p.

The government carried out an assessment of the value of properties in 2015, and decreased, or increased the rates owed accordingly.

The higher rates took effect from April 2017, two years after the valuations were made.

Mr Phayre-Mudge said online retailers such as Amazon have been advantaged by the change, as they require less real estate in cheaper out of town areas to do their business.

This means such companies have much lower costs than the bricks and mortar retailers who rent buildings from property companies.

It is the latter companies that are widely held in property funds bought by private investors and their advisers.

He said if the government do not act on the issue then vast amounts of retail property will lie empty, hurting the returns of property funds.

Robin Geffen, fund manager and chief executive at asset manager Neptune, said structural forces in addition to technological change means UK  commercial property is a poor investment.

Greater scrutiny of UK overseas territories that act as tax havens will also damage the returns available to investors in UK property, he said.

Mr Geffen added: “There is about £122bn of UK property assets owned by entities in these tax havens.

“That is a lot of money for one asset class, wherever that money has come from and whether it is hot money or not I think the greater level of scrutiny could lead to issues for that asset class.

“UK property has been a poor performer lately for other reasons, and I expect this is only the start of it. It is certainly not a risk I would want my 86-year-old mother exposed to.”

Mr Geffen added: “If you go to the top of a really tall building in London at night, look at all of the cranes. There is still a lot of building happening.

“But if you walk down somewhere like the Embankment in London at night, then look at all of the newly built flats, at how few of them have lights on.

“These companies can build the property at very low cost because interest rates are low, and then just hold them on their balance sheets, but they can’t do that forever.”

He said a contact of his who has been a professional investor in UK property for decades has the largest cash weighting he has ever had as a property investor, higher even than in previous financial crises.

Paul Stocks, financial services director at Dobson and Hodge in in Doncaster, said he has been much less keen to place client money in property funds since the global financial crisis.

A spokesman for HM Treasury said thousands of UK businesses don’t pay rates at all, and that the reforms they have implemented show they have listened to business.

Source: FT Adviser

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